Stock market investing sounds daunting to most people. Where does the fear stem from? Misinformation and lack of knowledge. In 2020, the barrier to entry has never been lower, and beginners have everything they need to begin their stock market journey.
Before delving into the specifics of how to approach this, it is essential to clear up the stock market terminology and offer some transparency as to what certain principles and ideas mean.
Investor Vs Trader
These words are often used interchangeably but they are not exactly synonyms. An investor is someone who buys company shares with the intention to sell for a profit in the long haul. A trader, on the other hand, is a person that buys company shares but does not hold on to them for long, looking to sell in within the day, week or month.
Where’s the value in differentiating between the two? It creates clarity as to what hat you’ll be wearing when you decide to make money from the stock market. Are you a trader or are you an investor? How much time and effort are you willing to allocate to this? Answering these questions is critical in shaping your game-plan and overall approach to the stock market.
The stock market refers to the buying and selling of company shares. The price of each stock is an amalgamation of company news, performance and what investors/traders value the company, at that specific point in time. The constant change of stock prices presents a window of opportunity for investors to sell at a higher price than they bought a stock at, translating into profit.
How does a trader/investor know when to buy or sell as stock? Well, that’s literally the name of the game. There is a lot of disagreement as to what is the right strategy to follow in order to make money in the stock market but the reality is, there is no one definite answer. The market is volatile and factors determining the change in prices are too many to track at all times.
What would be the wise thing to do is spend some time studying the available options. Knowledge is power, and before investing a single penny in the stock market, you need to understand how this marketplace works as well as the literature around trading strategies. Before becoming a player, try to be a coach and absorb as much information as you can. Studying and reading up on stock market trading strategies is probably the best investment you’ll make. It will enable you to make an informed decision about which route you’ll be taking.
There’s an abundance of trading strategies available for beginners. Every one of these strategies serves a different risk tolerance and follows a different methodology to interpret the market. There is no right way of looking at this as all strategies are based on solid principles and can prove profitable under the right circumstances.
As we’re about to enter 2020, it is safe to say that stock market trading is similar to a portfolio of different stocks and trading instruments in the sense that it needs to be diversified. Sticking to one strategy can be detrimental and rob you of the opportunity to make money. Let’s explore some stock market trading strategies and see which one would suit your profile and situation.
Buy & Hold
This is exactly what it says on the tin. Under the buy and hold principle, the investor buys stocks and holds on to them for the long run, putting faith in the business they have invested in. The successful use of cases of this strategy is countless. Investors like Warren Buffet have made a bulk of their money by holding on to stocks for decades, giving the company they invested in the time to develop, grow and reach its potential.
Can you imagine if you had invested in Apple before the iPhone made its appearance or Instagram before it was installed on almost every phone that has an Internet connection? These types of investments require patience but also a good eye for business. How could someone have predicted the meteoric rise of either Apple or Instagram? The answer is that they couldn’t but that doesn’t mean that long-term investment is an investment based on luck or chance.
Whilst long term investments do involve you taking a leap of faith, there’s a lot you can do to legitimize your choice. First and foremost, stay up to date with market news and trends. We can’t emphasize enough the importance of independent and personal research. A good trader/investor and a relentless reader before anything else.
If you were to look at the current business landscape, for example, artificial intelligence and virtual reality are some of the predominant ideas technologies that will be taking over the news and our lives in the following years. An investment related to companies developing such technologies would make a lot of sense and would not be considered a lucky guess.
Are you aware of the saying “You need money to make money”? It would be a good idea to forget it. Entering the stock market world as a beginner can quickly become a loss-making affair if you’re not careful. Losing money early rapidly is the most common deterrent for new traders/investors. How do you avoid it? Start small and take baby steps.
The first thing you should go after is a demo account. A quick look online will reveal many free demo account options where you essentially trade with fake money. This simulation is the perfect way to get through the jitters of the first few trades. You practice, learn and get wiser without losing money.
Once you go through this initial step, you should still keep a risk-averse stance and move into trading fractional shares. Instead of trading the full price of a stock, brokers will nowadays allow you to trade a fraction of the stock, lowering the amount of investment you will incur.
The momentum trading principles supports the notion of making buying/selling decisions based on a stock’s recent performance. This school of thinking postulates that a stock that has been trading in a certain direction carries force behind it that will allow it to trend in the same direction for the foreseeable future. One way you could describe this trading practice is “buy high, sell higher”. Even though you weren’t able to catch the stock at its lowest price point does not mean you can’t profit from it.
Unlike the aforementioned buy and hold strategy, momentum trading is a short term practice that is employed by traders, not investors. If the timing has ever been a valuable attribute, one could argue that it is the primary skill required in momentum trading. As a trader, you need to identify the right entry point and when to sell the stock. It is of paramount importance to be able to sense when stocks are about to shift gears and keep trending in the same direction. This usually happens when a company or market-wide news breaks out.
Just like every trading strategy, momentum trading comes with its pros and cons. On the positive side, you can earn a lot of money in a short time-span. On the negative side, it needs a lot of commitment and time as you need to be ready to react to market news.
How do you make money in the stock market as a beginner? You employ patience and make a conscious decision to invest time and effort in educating yourself around the matter at hand. Once you have nailed down these basic principles, you’re then ready to enter the world of stock market trading / investing. The strategies explored in this blog are just the tip of the iceberg with a lot more options available.
Hopefully, the presentation of these ideas has opened up the floodgates for thought and research into the world of stock market investing. For more information and tips on beginner trading, visit the EverFX website.